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Inflation Under Alternative Exchange Rate Regimes: What Happens When Countries Differ in Size?

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  • Andrew Hughes Hallett
  • Ella Kavanagh

Abstract

A three-country model is used to analyze how country size affects inflation under different exchange rate regimes. Two countries, an anchor country (leader) and a pegging country (follower), are examined where the latter differs in size. We find that the leader's preference for floating over pegging is unaffected by the follower's size except in the case where the follower is very small. However, as the follower gets smaller, the leader's inflation worsens under floating but improves under the single-currency peg. For the follower, as it gets smaller, its inflation performance improves when it floats its currency. But which regime is preferred is unclear. Copyright Kluwer Academic Publishers 2001

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  • Andrew Hughes Hallett & Ella Kavanagh, 2001. "Inflation Under Alternative Exchange Rate Regimes: What Happens When Countries Differ in Size?," Open Economies Review, Springer, vol. 12(2), pages 145-161, April.
    • Handle: RePEc:kap:openec:v:12:y:2001:i:2:p:145-161
    DOI: 10.1023/A:1008380312940
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    1. Hughes Hallett, Andrew & Mavrodimitrakis, Christos, 2019. "Cooperation vs. leadership in a core-periphery monetary union: Inter-country vs. inter-institutional policy coordination," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 103-122.

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